SBS-Wiki- EJournal-Ed-109-Aug-2023

Volume -109 August -2023 Pages 1-89 For private circulation only

Foreword Dear Readers, We bring you this month our anniversary edition. We have completed 14 years and to commemorate this event, we have brought changes to the cover page of the journal. The cover page only has undergone the change but not the content. For the anniversary edition, we have asked our team members (who never wrote) to contribute to the articles. Everyone has directly or indirectly contributed and the result is the bulky journal on your screen. A big thanks to all the contributors! This edition covers articles which are of great significance and of interest to both corporates and non-corporates. The article on ‘Game of Skill vs. Game of Chance & A Study on GST Implications on Online Gaming’ focuses on the recent decision of Karnataka High Court in Gameskraft and various court’s interpretation on game of skill vs game of chance. Though the judgment has said the games of skill does not fall under the ambit of GST laws and the expression ‘betting and gambling’ appearing in GST laws covers only games of chance, the recent decision of GST Council to treat the game of skill and game of chance as one for the purposes of GST laws is unwarranted. The GST Council is trying to re-write the settled law and this will be definitely challenged by the industry. Moreover, the taxing of the entire bet value is also unprecedented and will also be subjected to judicial scrutiny. We have also came up with an article ‘Decoding Applicability of GST on Interest – Credit Card Loan vs Standard Loan’. This article focuses on recent judgment dealing with tax implications on interest paid on loans taken using the credit card. The next article is on ‘Insolvency Proceedings against Financial Service Providers’ deals with the law involved in initiation of insolvency proceedings against FSPs which was a result of sub-committee report. Apart from the said law, the article also deals with certain litigations surrounding the trails of creditors in initiating the insolvency proceedings against FSPs. The next article is on ‘Important Aspects in IBC – Revisited through Recent Judgments’ details the litigation surrounding the basic (but powerful) terms under the IBC. Though the law has reached a decent maturity, there will be still a dynamic evolution on interpretation of certain basic terms like ‘debt’, ‘threshold limit’ and others. An interesting read.

From the direct taxation, we have three articles. The first one deals with the ‘Non-disclosure of foreign assets and consequences under Black Money Act’. For this article, we have taken the most general foreign asset (ESOPs issued by parent foreign entity) which may not be disclosed by the tax payers at the time of filing returns. Please be noted that the law is evolving on this aspect, since, now the tax authorities started focusing. The real depth and ambit of Black Money Act will be unleashed in future. Till then, it is required to take a conservative view and accordingly the article is drafted in this background. The second one deals with ‘Residential Status of an Individual and Company under DTAA’. This article focuses on determination of residential status for an individual and company when there is a possibility of being resident both under the domestic law and treaty. An interesting read. The third one deals with ‘Significant Disclosures in ITR by Individuals’ which focuses on the major disclosures that need to be made by individuals while filing their returns. Having done these disclosures, an individual would be in a better position while facing scrutiny or other proceedings. We have also collated certain important judgments under direct tax and indirect tax laws, provided our comments wherever necessary. I hope that you will have good time reading this edition and please do share your feedback. Thanking You, Suresh Babu S Founder & Chairman

Contents Online Rummy – Game of Skill or Game of Chance? & GST Implications on Online Gaming.........................................1 Decoding GST Applicability on Credit Card Loans: A Case Study ..............................................................................11 Determination of Residential Status of a Person under DTAA .................................................................................14 Non-Disclosure of Foreign Assets and Consequences under Black Money Act!.........................................................22 Significant Disclosures in Income Tax Returns by an Individual ...............................................................................33 Acquisition of Immovable Property in India by a Non-Resident - FEMA ...................................................................40 Insolvency Proceedings Against ‘Financial Service Provider’ under the IBC, 2016 .....................................................46 Important Aspects in IBC Law - Revisited Through Recent Judgements....................................................................62 Lapses in Corporate Governance & Auditing Ethics in ‘Café Coffee Day’ group.........................................................74 Summary of GST Decisions..................................................................................................................................83 Summary of Income Tax Decisions.......................................................................................................................87

Online Rummy – Game of Skill or Game of Chance? & GST Implications on Online Gaming The decision of Karnataka High Court in Gameskraft Technologies (P) Limited ([2023] 150 taxmann.com 252 (Karnataka)) has saved the online gaming industry. The High Court held that games of skill are not to be covered under the expression ‘betting and gambling’ in Entry 6 of Schedule III of CT Act. This was a huge relief for the online gaming industry, which are into organizing the games with skill. Examples can be rummy, cricket and various other games which involve skill rather than chance. However, on the other hand, the recent decision of GST Council to bring tax on the face value instead of the service fee has rattled the industry. What is furthermore troublesome is the approach of the Council towards these games. The Council has earlier constituted a Group of Ministers (GoM) to study and propose the tax implications on Casinos, Racecourses and Online Gaming. The GoM has submitted its report as part of the 47th GST Council Meeting. The report was taken into consideration during the 50th GST Council Meeting and tax was brought on the complete bet value. On one hand, the Karnataka High Court and various other Courts have held that games involving skill does not fall under the ambit of expression ‘betting and gambling’ as appearing in Entry 64 of List II of Seventh Schedule to Constitution of India. Applying the same analogy under the GST laws, the Courts (Karnataka High Court in Gameskraft and Bombay High Court in Gurdeep Singh Sachar (2019 (30) GSTL 441 (Bom))) held that games of skill does not fall under the ambit of ‘betting and gambling’ as appearing in Entry 6 of Schedule III to CT Act, thereby becoming actionable claims whose supply is treated neither supply of goods nor supply of services. However, as stated earlier, the way the GST Council looks at the above is in complete contradiction. With the above background, we shall proceed to examine in this article, the various hues of the issue by analyzing the judgment of Karnataka High Court in Gameskraft and take key pointers as to how the law surrounding the gambling and betting vis-à-vis GST is to be interpreted. -Contributed by CA Sri Harsha [email protected] 1. Before dealing with the core issue, a few aspects dealing with the scheme of GST to the extent it is 1|Page Volume -109 August -2023

Online Rummy – Game of Skill or Game of Chance? & GST Implications on Online Gaming relevant to article is worth discussing. with/without stakes amounts to ‘gambling or betting’ for the purposes of GST laws? 2. A stark difference between the erstwhile indirect taxation regime to the current GST regime is the 5. Gameskraft Technologies Private Limited (for definition of ‘goods’. Earlier, the actionable brevity ‘Gameskraft’) is an online intermediary claims are not included in the definition of company who runs technology platforms that ‘goods’. They used to be outside the ambit of allows users to play skill based online games definition of ‘goods’. Under the GST laws, the against each other. The platform has over 10 lakh definition of ‘goods’ specifically includes users from across India. A search and seizure ‘actionable claim’. Though, the definition of action was undertaken on Gameskraft which led ‘goods’ specifically include ‘actionable claim’ in to issuance of intimation to pay tax of Rs its ambit, the supply of all the actionable claims 2,09,89,31,31,501/- (I have to take help of Google are not categorised as supplies under GST laws. to put the above amount in words - close to Rs This is evident from reading Entry 6 of Schedule 2,100 Crores). The said intimation was the subject III to CT Act, which lists, ‘actionable claims, other matter of the writ proceedings before the High than lottery, betting and gambling’ as activities or Court. An interim order of stay was granted by transactions which shall be treated as neither the High Court. Thereafter, a show cause notice supply of goods nor supply of services. Hence, under Section 74(1) was issued to Gameskraft, supply of actionable claims (Other than lottery, which were again challenged before the High betting and gambling) are neither supply of goods Court in writ proceedings. All India Gaming nor supply of services. Federation and E-Gaming Federation have joined as intervenors supporting Gameskraft before the 3. From the above, it is evident that lottery, betting High Court. and gambling are classified as ‘actionable claims’ and thereby brought to tax. In this article, we 6. The modus operandi of running the online games shall deal only with the betting and gambling, as explained by Gameskraft is worth knowing. since the issues surrounding the lottery and its Gameskraft claims that it has no role/influence in valuation are settled by Hon’ble Supreme Court so far as the playing of the games is concerned. in Skill Lotto Solutions Private Limited1. The users/players choose the games based on the amount they want to stake to match their skills 4. The core issue before the High Court is whether against other players who want to play a similar offline/online games such as ‘Rummy’ which are amount. Gameskraft merely hosts the games and mainly/preponderantly/substantially based on the discretion to play a game and the stake for skill and not on chance, whether played which it is to be played entire lies within the 1 2020 (12) TMI 140 – Supreme Court Volume -109 August -2023 2|Page

Online Rummy – Game of Skill or Game of Chance? & GST Implications on Online Gaming domain of user/player and Gameskraft does not Core Arguments by Gameskraft: have any say in this. 9. Gameskraft contended that the above allegation 7. The same is explained by way of an example by of the authorities is fallacious, perverse and Gameskraft, which puts the entire modus without understanding the business. Gameskraft operandi in the right perspective. ‘A’ and ‘B’ after argued that more than 96% of games played on downloading the mobile application of their platforms are ‘based on skill’ and hence do Gameskraft, they have to deposit Rs 200/- each not fall under the ambit of ‘betting or gambling’ for participation in the game. The winner at the under Entry 6 of Schedule III. Gameskraft stated end of the game gets Rs 360/- as winnings. For that if the analogy of the tax authorities is applied allowing ‘A’ and ‘B’ to use its platform for to all players, then the entire amounts received participating in the game of rummy, Gameskraft by intermediaries would be brought to tax. Since would be charging Rs 20 from each, amounting to the buy-in amounts are not the property of the Rs 40/- in total as ‘platform fee’. Gameskraft is Gameskraft, there cannot be any tax payable on paying tax on Rs 40/- which is the ‘platform fee’ such amounts. Gameskraft refuted the argument and till the winner is decided, it holds Rs 360/- in of the tax authorities that discounts/incentives a designated account, on which it does not have were given to induce the players by stating that any right or lien. the players are free to take their winnings back to their bank account or to hold them in their wallet 8. The case of the tax authorities is that the accounts. They have also argued that just Gameskraft is intentionally misclassifying their because providing discounts and incentives to supplies as supply of services, whereas in fact, the market one’s business and platform does not and supplies are in the nature of actionable claims cannot change the nature of games played on the (betting or gambling) that is supply of goods. platform and rummy continues to be a ‘game of Accordingly, the contention of the tax authorities skill’, whether or not discounts offered. is that the buy-in amounts received by Gameskraft also argued that playing a ‘game of Gameskraft (that is Rs 400/- in the above skill’ for money does not partake the character of example) is consideration for supply of goods and betting and it still remains within the realm of accordingly tax is to be paid on Rs 400/- and not ‘games of skill’ only. The term ‘betting and Rs 40/-. Going by this analogy, the tax authorities gambling’ cannot be artificially bifurcated by tax issued a demand notice treating the entire buy-in authorities to carve out an exception by stating amount of Rs 70,000 Crores as consideration for that ‘games of skill’ played with monetary stakes supply of actionable claims. can also partake the character of betting and hence taxable at 28% as envisaged by the tax authorities. 3|Page Volume -109 August -2023

Online Rummy – Game of Skill or Game of Chance? & GST Implications on Online Gaming Core Arguments by Tax Authorities: notice should be upheld. The tax authorities argued that game of skill played for stakes would 10. On the other hand, the tax authorities argued still amount to betting and the Supreme Court that the platform of Gameskraft allows players of has not specially blessed such games alone to be online rummy to place stakes and bet on the played with stakes. outcomes of such games. They have relied on precedents which held that profits and gains from Analysis by Karnataka High Court: such games of rummy would amount to betting and gambling. The tax authorities stated that 11. The Court after referring to the basic provisions rummy is ‘game of chance’ on the reasoning that of GST laws have proceeded to examine the main only criteria to enter a particular table in question that is, whether the ‘game of skill’, Gameskraft’s platform is to stake a particular either wholly or predominantly, can be classified amount and once an amount is staked, the as lottery, betting and gambling, so that the platform places the player in a table where fellow ‘game of skill’ also attracts tax under the players have also staked equal amount and the provisions of GST laws? platform does not record the skill level of player and odes not disclose the skill level of a particular 12. If the answer to the above question is affirmative, player to all the players seated at a table. From then even a ‘game of skill’ attracts tax because it the above, the authorities argued that any falls under the category of ‘lottery, betting and common man can login and play the game and gambling’. However, if the response is negative, when skill is not the qualifying criteria, this then the ‘game of skill’ is out of the ambit of GST amounts to ‘game of chance’ and not ‘game of laws, since it falls under the ambit of ‘actionable skill’. Gameskraft charging 10% commission as claims’, the supply which is neither considered as ‘service fee’ is to be disregarded, as service fee supply of goods nor services. Hence, it is must be charged purely for meeting expenses and important to examine, when a game is classified must apply uniformly across the board to all as a ‘game of chance’ and ‘game of skill’. players and must most importantly be independent of the games of rummy. The Game of Skill vs Game of Chance: authorities alleged that the service fee changes from table to table depending upon the stakes at 13. The concept of ‘betting and gambling’ was a particular table. The profiting by Gameskraft considered by the Hon’ble Supreme Court and from the games is alleged to be in teeth of judicial other courts in various contexts. precedents claiming to be the ‘game of chance’ and accordingly prayed the High Court that the Musings from RMDC-12: 14. The first of the lot is, RMDC-1, wherein the apex court held that any game/competition that relies 2 State of Bombay vs RMD Chamarbaugwala – AIR 1957 SC 699 Volume -109 August -2023 4|Page

Online Rummy – Game of Skill or Game of Chance? & GST Implications on Online Gaming substantially upon exercise of skill cannot be gambling) and tax on such activities can be only classified as ‘gambling’. The Supreme Court was under Entry 60 (tax on trade). The High Court dealing with a challenge on legislation dealing rejected the argument canvassed by tax with taxation on prize competitions. The authorities that the players of rummy for stakes Supreme Court in RMDC-1 was asked to are forecasting the outcome of the game for prize determine, whether the prize competitions and are therefore gambling by stating that player would amount to gambling or game of skill? The who is involved in a game of skill does not Supreme Court after referring to various forecast victory but plays in the confidence that provisions of the act involved therein, and English he will win. He is not betting or gambling or judgments held that the prize competitions run something but is confident on his skills. by RMDC, therein fall under the ambit of gambling, since they are not based on skill. One 17. The High Court held that the game of rummy as of the categories of the prize competitions opposed to the second category is not one where (second category) which RMDC argued that it the outcome of an event is being predicted. It is a would be a game of skill, the Supreme Court game where predominantly skill is exercised to turned down such argument. The Court held that control the outcome of the game. The game of even such categories of prize competitions were Rummy is not one where forecasting or called as gambling. predicting the answer or the winner against stakes in the activity of the player. The game is 15. The High Court rejected the tax authorities stand one, where exercise of substantial skill is the that the activities of Gameskraft fall under the activity of the player, and such skill controls the second category and thereby the game of skill are outcome of game and not chance. When the also covered under the ambit of gambling as held outcome of the game is dependent substantially by Supreme Court in RMDC-1. The High Court or preponderantly on skill, staking on such game stated that the tax authorities have wrongly does not amount to betting or gambling. understood the conclusion arrived at by Supreme Court in RMDC-1. Even assuming that the 18. The High Court accordingly concluded that it is activities of Gameskraft fall under second not permissible for the tax authorities to read a category, the same were held to be gambling by single line in judgment of RMDC-1 shorn of the the Supreme Court and not a game of skill falling context and say that the game of Rummy falls under the ambit of gambling. under the second category. The Court stated that there is an element of ‘chance’ in each game and 16. The Supreme Court in RMDC-1 in clear terms held a ‘game of skill’, may not necessarily be such an that games which are based on skill cannot fall activity where ‘skill’ must always prevail. It is well under Entry 62 (legislations for betting and settled in law, wherein, an activity the ‘exercise 5|Page Volume -109 August -2023

Online Rummy – Game of Skill or Game of Chance? & GST Implications on Online Gaming of skill’ can control the ‘chance’ element involved Game of Skill when played for stakes – amounts in the particular activity, such that the better skill to Gambling?: would prevail more often than not, such activity qualifies as game of skill. Hence, the High Court Musings from Satyanarayana’s Case4: held that game of Rummy played with stakes cannot be viewed as a ‘forecast’ or a shot at the 20. This judgment of Supreme Court in fact in clear ‘hidden target’. terms stated that the game of Rummy is game of skill and not chance. The above judgment was Musings from RMDC-23: relied (specifically Para 12) by the tax authorities to state that when a game of skill played with 19. The Supreme Court was seized with a challenge stakes involved, the same turns to be a game of to the constitutionality of the Prize Competitions gambling. Act, 1955. The petitioners argued that the definition of ‘prize competition’ included not only 21. The High Court turned down this allegation by gambling competitions but also those acts in stating that it is true that the Supreme Court in which success depend to a significant degree on Satyanarayana’s case observed that when an skill. The Supreme Court reiterated the ratio in owner of the house or club is making a profit or RMDC-1 and held that the distinction between gain from the game of rummy or any other game the two types of competitions is as distinct as the played for stakes, the offence of operating a distinction between commercial and wagering ‘common gaming house’ may be attracted and contracts. The Supreme Court then stated that this cannot be taken to suggest that games of those competitions that had skill as the main rummy when played for stakes would take into deciding factor of the outcome of the the realm of gambling and such an inference competition would not come within the ambit of cannot be accepted. The High Court also held that Prize Competition Act, 1955. Finally, the Court the club in question in Satyanarayana’s case was held that phrase ‘betting and gambling’ a ‘Members Club’ and what was held to be appearing in Entry 34 of List II does not include possibly illegal was charging a ‘heavy charge’ on the games of skill. The High Court accordingly the members for playing in card room for the held that from the reading of RMDC-1 and RMDC- purpose of making profit or gain and the said 2 it is sufficient to indicate that the same scenario cannot be extended to Gameskraft’s completely support the case of Gameskraft and platform. the intervenors. 22. The High Court held that once a game is called as a game of skill, then the same cannot be falling foul of the common gambling house. This is 3 RMD Chamarbaugwala vs Union of India – AIR 1957 SC 628 4 State of Andhra Pradesh vs. K Satyanarayana & Ors – AIR 1968 SC 825 6|Page Volume -109 August -2023

Online Rummy – Game of Skill or Game of Chance? & GST Implications on Online Gaming because, said common gambling house is Court considering the fact that several persons prohibited from making profit or gain from a lose their livelihood in video gaming which on game based on chance and not game based on facts could be mixed game of skill and chance and skill. Since Rummy was held to be game of skill, that these activities could be subjected to then profit or gain earned by common gambling licensing. The High Court held that this judgment house cannot be said to be prohibited. If such an does not in any way help the case of tax interpretation is taken then the judgment of authorities. The High Court also referred to the Satyanarayana will contradict Para 5 of RMDC-2, decision of its divisional bench in All India Gaming which permits running business involving games Federation7, where the tax authorities took the of skill. The High Court also held that last portion same plea based on MJ Sivani’s case and was of Paragraph 12 in Satyanarayana’s case states turned down. The High Court has stated that that the offence of being ‘common gambling definition of ‘gaming’ is confined to playing a house’ is attracted when the club itself is game of chance for stake or wager and nothing concerned with the outcome of the game (or if more and that ‘gaming’ is synonymous with there is side betting), as recognised by Kerala gambling. In other words, the said definition High Court’s judgment in Head Digital’s case5. The nowhere holds that playing a game of skill for High Court stated that it is no one’s case that stake or wager also amounts to ‘gaming’ or Gameskraft is concerned/interested on the ‘gambling’. The High Court held that the Supreme outcome of a game played by players on its Court in MJ Sivani’s case does not hold that the platform and accordingly concluded that the ‘video gaming’ is akin to ‘gambling’ and contention of tax authorities to picture accordingly granting such games protection Gameskraft platform as common gambling house under Article 19(1)(g) of Constitution. The High is erroneous. Court stated that nowhere in judgment of MJ Sivani, it was held that playing a game Musings from MJ Sivani’s case6: ‘predominantly of skill’ played with money or money’s worth or for stakes amount to ‘gaming’ 23. The tax authorities has placed huge reliance on or that such an activity amounts to ‘gambling’. the judgment in case of MJ Sivani to state that Hence, the High Court repelled the contentions of game of skill when played for stakes amounts to tax authorities. gambling. The question before the Supreme Court in this case was, whether a video game is a game of skill or chance and liable to be regulated under Mysore Police Act, 1963. The Supreme 5 Head Digital Works Private Limited vs. State of Kerala – 2021 7 All India Gaming Federation vs State of Karnataka & Ors – SCC Online Ker 3592 2022 SCC OnLine Kar 435 (DB) 6 M.J.Sivani and Ors vs State of Karnataka (1995) 6 SCC 289 Volume -109 August -2023 7|Page

Online Rummy – Game of Skill or Game of Chance? & GST Implications on Online Gaming Musings from K.R.Lakshmanan’s case8: laid down in RMDC-1 RMDC-2 and Satyanarayana’s case i.e., competition/game 24. The Supreme Court in this case was seized with which substantially depend upon skill is not the validity of legislation dealing with abolition of gambling. The Supreme Court in K.R. Lakshman’s horse races. The petitioner’s contended that case concluded that even if there is wagering or horse riding is a universally recognised sport, and betting with the club it is on a game of mere skill it involves special skill to win a match and not and as such, it would not be gaming. The High based on betting or gambling. The petitioner’s Court held that from the above observation, it is relied on the judgment of Satyanarayana (supra), evident that wager or betting on a game of skill RMDC-1 (supra) and RMDC-2 (supra). On the does not amount to gambling. other hand, the State contended that horse riding is a form of betting which involves a skill neither 27. The High Court further rejected the argument of from the horse nor from the rider but from the tax authorities that predicting the winner of better who has to keep a keen check over the horserace for stakes is held to be gambling in the horses to determine its capability by observing judgment of K.R. Lakshman’s case by Supreme various matches, which is a pure skill that any Court by stating that such an inference is uncalled better should possess and State legislature for, since the Supreme Court did not deal with reserves its authority under Entry 34 of List II of such an issue. Assuming it has dealt, even then, Seventh Schedule to the Constitution to make the the same cannot be applied to Rummy because act abolition of horse riding. Rummy is not a game where the outcome is being predicted or forecasted, but is a game being 25. The Supreme Court came to the conclusion that played where success and the outcome of the for a game/sport is not considered as betting or game is substantially and preponderantly gambling and to enjoy protection under Article dependent on the exercise of skill of the player. 19(1)(g), it must have a substantial degree of skill Accordingly, the High Court held that in games of which makes it unique. Since the horse riding skill, the person places a stake based on his involves special skills of the horse and rider, the confidence and even third parties would do so is said activity cannot be called as gambling or also clear and under these circumstances, the betting and thus declared the abolition of horse K.R. Lakshman’s case completely supports riding as unconstitutional. Gameskraft. 26. The High Court stated that in K.R. Lakshman’s case, the Supreme Court clearly notes that ‘gaming’ can only be interpreted in light of law 8 Dr KR Lakshmanan vs State of Tamil Nadu (1996) 2 SCC 226 Volume -109 August -2023 8|Page

Online Rummy – Game of Skill or Game of Chance? & GST Implications on Online Gaming Musings from Head Digital Works case (supra): ‘game of skill’ have developed meaning in judicial parlance and they have to be interpreted only in 28. The High Court of Kerala came to the conclusion a way that the law understands. As discussed in that playing for stakes or playing not for stakes above paragraphs, it is evident that game of can never be a criterion to find out whether a Rummy is a game of skill and not a game of game is a game of skill or chance. Online Rummy chance. played with or without stakes remains to be a ‘game of skill’. It was held that since the game 31. The High Court stated that the expression does not come within the meaning of ‘gaming’ or ‘betting and gambling’ appearing in erstwhile ‘gambling’, providing a platform for playing the Entry 62 of List II was amended and the said game, which is nature of business cannot be expression was omitted for the reason to curtailed. subsume the same into the GST regime. The High Court placing reliance on the judgment of State of Musings from Junglee Games case9: Karnataka vs State of Meghalaya10 [wherein the Supreme Court held that the interpretation of the 29. The High Court then referred to the judgment of expression ‘betting and gambling’ in context of Madras High Court in Junglee Games. The Madras Entry 34 of List II shall apply to the expression High Court held that ‘gambling’ and ‘gaming’ ‘betting and gambling’ under Entry 62 of List II] have attained secondary meanings in judicial held that ‘betting and gambling’ appearing in parlance and that the principles of nomen juris Entry 6 of Schedule III of CT Act11 should also be cannot be shrugged off to understand such words interpreted in the same way as interpreted for to mean or imply anything other than how they Entry 62 of List II. have been judicially interpreted. The Madras High Court held that game of skill may not necessarily 32. Accordingly, the High Court held that the terms be such an activity where skill must always ‘betting and gambling’ appearing in Entry 6 of prevail, it would suffice for an activity to be Schedule III must be given the same regarded as a game of skill if, ordinarily, the interpretation given to them by Courts, in the exercise of skill can control the chance element context of Entry 34 of List II. Accordingly, the involved in the activity such that the better skilled games of skill cannot be falling under the ambit would prevail often. of ‘betting and gambling’ as appearing in Entry 6 ibid. Hence, the games of skill that is in the instant Conclusion by Karnataka High Court: case, Rummy, is covered under the actionable claims part in Entry 6 of Schedule III and thereby 30. The High Court concluded by stating that the words ‘gaming’, ‘gambling’, ‘game of chance’ and 9 Junglee Games India (P.) Ltd. v. State of Tamil Nadu — 2021 10 2022 SCC OnLine SC 350 SCC OnLine Mad. 2762 11 Central Goods and Services Tax Act, 2017 9|Page Volume -109 August -2023

Online Rummy – Game of Skill or Game of Chance? & GST Implications on Online Gaming does not constitute ‘supply’ for the purposes of the gaming industry would be under severe CT Act. This holds good whether the game of hardship considering the recent council Rummy is played for stake or not. This holds good decisions. even if the definition of ‘business’ vide Section 2(17) of CT Act includes the wager in its ambit. Volume -109 August -2023 Our Comments: 33. The High Court after surveying various decisions have come to conclusion that the expression ‘betting and gambling’ has to be understood in light of the judicial precedents. It is important to note that though there was a definition for ‘betting or gambling’ under the service tax law, there does not exist one under the GST laws. Even considering the definition of ‘betting or gambling’ under service tax law, it covers activities which are based on chance. Hence, even under the previous regime, the games of skill are not covered under the ambit of ‘betting or gambling’. 34. The absence of specific definition under the GST laws tilts the balance to the favour of taking the meaning from the judicial precedents. However, as discussed above in the opening paras of the article, the GoM does not differentiate between the game of chance and game of skill. They proceed with an assumption that the expression ‘betting and gambling’ as appearing in Entry 6 of Schedule III of CT Act covers both the game of skill and game of chance. This is in complete contradiction to the judgments detailing that games of skill are out of the ambit of ‘betting and gambling’. Whether this convenient ignorance of the distinction is in accordance with the law or ultra-vires, the courts have to finalise. Till then, 10 | P a g e

Decoding GST Applicability on Credit Card Loans: A Case Study In recent times, banks are offering several types of loans like personal loan, pre-approved loan, and instant loan etc., based on credit card usages and credit rating. Now the question arises whether these loans provided by the banks will fall under the credit card services or all together a different loan transaction? In this context, one particular issue that has come before the Honorable High Court of Calcutta in the case of Ramesh Kumar Patodia (2023 (7) TMI 1102 - CALCUTTA HIGH COURT) and in this article, we will delve into the applicability of GST on credit card loans by analyzing the above case which sheds light on this complex issue. -Contributed by CA Sri Harsha & Bharadwaja [email protected] Background of the case: tax, the Appellant has challenged the levy of tax 1. In the present case, the appellant has a credit on the interest component. card provided by the bank and he was offered 3. The whole issue arisen before the said forum is with ‘increased pay lite loan’ with equated due to exemption entry provided for interest. The monthly installments for a period of 12 months. specific exemption entry14 excludes the interest The offer has been accepted by the appellant and component on the credit card services and hence, the bank discharged the same by account payee the same amounts to taxable. Since the credit cheque. Thereafter, the appellant regularly card services is taxable, the bank has accordingly disbursed the monthly EMIs along with the credit charged the IGST also on the interest component card payments and cleared the loan within the on the loan provided to the Appellant. Hence in stipulated time. the given case, whether the interest component charged is related to the credit card services or 2. However, at a later point of time, the appellant the services in by way of extending a loan came to know that IGST12 was charged on the transaction? interest portion that paid by him. Since the interest on loan or advances are exempted13 from 12 Integrated Goods and Services Tax 14 Serial No. 28 of N. No. 9/2017 – IT (R) dated 28.06.2017 13 Serial No. 28 of N. No. 9/2017 – IT (R) dated 28.06.2017 Volume -109 August -2023 11 | P a g e

Decoding GST Applicability on Credit Card Loans: A Case Study Distinction between Credit Card Services and conditions in the agreement is the tax chargeable Loans: on the interest component, which is also deemed 4. Since the Credit Card Services is not defined in the to be accepted by the appellant and accordingly, GST laws, the appellant has referred to the the tax is charged and collected from the definition of ‘Credit Card Services15’ in the appellant in his monthly EMIs. Services Tax laws and accordingly contended that to be a credit card service, the transaction should The Court's Interpretation: take place through the card provided by the bank. 7. The court's interpretation clarifies that for a Further, he also contended that the issuer of the card levies an annual fee or interest in case of service to be considered a \"credit card service,\" it deferred payment by the holder of the card. should involve a direct relationship between the However, the loans are the financial assistance issuer of the card and the cardholder, and such provided by the financial institutions for which relationship should be connected to the holding, interest is charged by them in lieu of such operation, or use of the card, including services. transactions made using the card. The court emphasizes that if a bank issues a card to a Appellant's Argument: customer who also holds an ordinary savings 5. Appellant has argued that the bank provided the account with the bank, the services related to the ordinary account holding are distinct from the loan through a distinct agreement, without services provided to the same customer as a involving use of credit card in the transaction. He cardholder. also emphasizes that monthly EMI mentioned in the credit card statement, that does not mean 8. In the present case, the loan provided to the the interest charged on such loan is related to the appellant was not advanced through the use of credit card services. He also asserted that the the credit card. The bank declared the appellant interest charged on the said loan is distinct from eligible for the loan, and the loan amount was the interest charged on the credit card disbursed through a separate means, such as a transactions. cheque or draft. The loan transaction was not generated by charging the appellant's card. The Bank's Counter Argument: monthly statement issued by the bank, which 6. On defense, the bank argued that the loan was included information about the loan amount and EMIs, was merely a statement of account. The provided as a part of credit card services and the loan transaction should be treated as a separate bank also contended that appellant has agreed to transaction, unrelated to the services rendered in the conditions laid down in the agreement at the time of providing the loan. Further, one of the 15 Section 65(33A) of the Finance Act, 1994 Volume -109 August -2023 12 | P a g e

Decoding GST Applicability on Credit Card Loans: A Case Study connection with the credit card. As a result, the court concludes that the transaction between the appellant and the bank cannot be categorized as a \"credit card service\" and, therefore, is not subject to GST. Conclusion: 9. The above case law distinguished the credit card services and the loans services. Thereby, the loans granted to the credit card holders should be treated as standard loans for GST purposes and the borrowers are now not liable to pay the GST on the interest component of such loans. Further, the financial institutions are now prohibited from charging GST on the interest component on such services, unless the judgment is reversed in the higher forum, or an amendment is made to the law. 13 | P a g e Volume -109 August -2023

Determination of Residential Status of a Person under DTAA Determination of residential status of a person is pre-requisite for computation of tax liability under the Income Tax Act, 1961 in India. This is because, as per the provisions of section 5 of the IT Act, global income earned by a resident is taxable in India. Section 6 of the IT Act prescribes methods for determination of residential status of a person in India. Similarly, other countries/tax jurisdictions may also contain rules for determination of residential status of person. In such a situation, ‘How to determine the residential status of a person?’ is a big question. A Double Taxation Avoidance Agreement entered between two countries provides answer to the above question. In this Article, determination of residential status of a person including individual, company and other persons` have been discussed in detail. -Contributed by CA Sri Harsha & CA Narendra [email protected] Introduction: different approaches thereby conflicts may arise 1. In order to levy a tax on any income earned by a in taxing a particular income. The conflicts are generally categorized into following types: person, there should be a nexus. The nexus can be a source or residence/citizenship. Under the i. Source – Source Conflicts: A country may source rule, a country may levy tax on the total follow its own approach for determination of income earned by a person in that particular source of income under the domestic laws of country. Similarly, a country may levy tax on the such country. Similarly, other country may total income earned by a resident/citizen also follow its own approach under the whether or not such income earned in that domestic law for determination of source of country. income. This conflict may not be eliminated even under the treaty16 unless both 2. For determination of such nexus viz source or countries agree to do so. residence, different countries may follow Volume -109 August -2023 16 Double taxation avoidance agreement between two countries. 14 | P a g e

Determination of Residential Status of a Person under DTAA ii. Resident – Resident Conflict: Similar to the year, or 60 days or more in the current year and source rule, a country may incorporate its 364 days or more in the preceding four years. own rules for determination of residential However, the above limit may vary subject to status of a taxable person under the satisfaction of conditions specified in Explanation domestic laws of such country. When two 1 to section 6(1)19. different countries provide different parameters for determination of residential 5. Once an individual is considered as resident status, a person may become resident of under section 6 of the ITA, total income earned both the countries. This conflict has been by such person is taxable in India whether or not eliminated under the treaty. such income is earned in India. Similarly, other country may follow domestic laws of such iii. Source – Resident Conflict: as discussed country for determination of residential status of above, a country may tax total income an individual. In certain situations, such an earned in that particular state and also total individual may become resident in both the income earned by resident of such state countries under the domestic laws of those thereby a person is taxed in two jurisdictions countries. In such a scenario, it is required to in respect of same income earned by that analyse the residential status of such an person. This conflict is called as source- individual under the provisions of the treaty. resident conflict. This approach results in juridical double taxation. 6. Article 4 of OECD MTC20 deals with the concept of resident. Para 1 of Article 4 is reproduced below: 3. In this Article, the discussion is limited to resident ‘For the purposes of this Convention, the term - resident conflict. Let us proceed to analyse, “resident of a Contracting State” means any determination of residential status of a person person who, under the laws of that State, is under the treaty. liable to tax therein by reason of his domicile, residence, place of management or any other Residential status of an individual: criterion of a similar nature, and also includes 4. Before understanding the residential status that State and any political subdivision or local authority thereof as well as a recognised under the treaty, it is required to analyse the pension fund of that State. This term, however, residential status under the domestic law17. does not include any person who is liable to tax Section 6(1) of ITA18 states that an individual is in that State in respect only of income from considered as a resident in India if he stays in India for a period of 182 days or more during the 17 Resident status under the Indian ‘Income Tax Act, 1961’ is 19 For a detailed understanding of residential status of an considered for the purpose of this paper. individual, read our Article at various-issues-of-residency- 18 Income Tax Act, 1961. under-section6.pdf (sbsandco.com) 20Model Tax Convention on Income and on Capital 15 | P a g e Volume -109 August -2023

Determination of Residential Status of a Person under DTAA sources in that State or capital situated the DTAC, what is relevant is the legal situation, therein.’ namely, liability to taxation, and not the fiscal fact of actual payment of tax. 7. Para 1 of Article 4 states that a person is treated as resident of a particular country if such person 10. Once the above condition is satisfied, one needs is liable to tax in such country by reason of his to analyse the second condition i.e., whether domicile, residence, place of management or any such liability arises by reason of his domicile, other criterion of a similar nature. From the residence, place of management or any other above, it can be understood that two conditions criterion of a similar nature. need to be satisfied in order to consider a person as a resident of a particular country. 11. In this regard, the OCED Commentary states that the definition refers to the concept of residence • He shall be liable to tax in such country: and adopted in the domestic laws. As criteria for taxation as a resident, Article 4 mentions • Such liability arises by reason of his domicile, domicile, residence, place of management or any residence, place of management or any other criterion of a similar nature. As far as other criterion of a similar nature. individuals are concerned, the definition aims at covering the various forms of personal 8. The word liable to tax plays a vital role in attachment to a State which, in the domestic determination of residential status of an taxation laws, form the basis of a comprehensive individual. OECD Commentary on Article 4 of MTC taxation (full liability to tax). It also covers cases states that a person shall be liable to tax in a where a person is deemed, according to the particular country on comprehensive basis in taxation laws of a State, to be a resident of that order to satisfy the above condition. The State and on account thereof is fully liable to tax commentary further states that a person is therein. considered as ‘liable to tax’ in that country on comprehensive basis even if such country does 12. Which means that for determination of not impose tax on such person (or provides residential status of a particular person, one exemption from taxation). needs to go back to the provisions of the domestic laws of particular country. If such an 9. The Hon’ble Supreme Court of India in the case of individual satisfies the conditions in domestic Azadi Bachao Andolan21 has analysed the concept laws of both the countries, there arises resident - of liable tax and held that ‘liability to taxation’ is resident conflict. In order to eliminate this a legal situation whereas payment of tax is a fiscal conflict, a tie breaker rule has been provided in fact. For the purpose of application of Article 4 of 21 [2003] 132 Taxman 373 (SC) Volume -109 August -2023 16 | P a g e

Determination of Residential Status of a Person under DTAA the treaty for determination of residential status authorities of the Contracting States shall of an individual. settle the question by mutual agreement.’ Tie Breaker Rule under the treaty: 14. Para 2 of Article 4 provides comprehensive 13. As stated above, if an individual is considered as procedure for tie breaker test. In order to determine the residential status of an individual, a resident of both the countries, residential status above steps have to be followed: of such individual shall be determined based on the tie breaker rule provided in para 2 of Article 4 i. Permanent Home: permanent home test is of treaty. Para 2 of Article 4 of treaty is produced first test in tie breaker rule. Under this test, below: an individual is considered as a resident of particular country in which such person has ‘2. Where by reason of the provisions of a permanent home. Let us proceed to paragraph 1 an individual is a resident of both analyse the concept of the ‘permanent home Contracting States, then his status shall be available’ to the individual. Para 13 of OECD determined as follows: commentary on MTC states that any form of home viz own house or rented house, a) he shall be deemed to be a resident only apartment or building may be considered for of the State in which he has a permanent the purpose of this test. home available to him; if he has a permanent home available to him in both However, permanency of the home is States, he shall be deemed to be a essential for the purpose of determination of resident only of the State with which his residential status. This means that the home personal and economic relations are shall be available continuously and not closer (centre of vital interests); occasionally for a short duration viz.travel for pleasure, business travel, education b) if the State in which he has his centre of travel or attending a course. Further, even vital interests cannot be determined, or if the assessee is having a home available to he has not a permanent home available him shall not be considered as permanent to him in either State, he shall be deemed home if such home is rented out and to be a resident only of the State in which effectively handed over to an unrelated he has an habitual abode; party so that the individual no longer has the possession of the house and the possibility c) if he has an habitual abode in both States to stay there. or in neither of them, he shall be deemed to be a resident only of the State of which Volume -109 August -2023 he is a national; d) if he is a national of both States or of neither of them, the competent 17 | P a g e

Determination of Residential Status of a Person under DTAA The Indian Income Tax Appellate Tribunal analysed on case-to-case basis. The next (Mumbai Bench) in the case of Shalini aspect is, if an individual has permanent Seekond22 has held that the availability of home in both the states, then, such permanent home as is referred to in Article individual has to proceed to analyse the next 4 has nothing to do with ownership of an step. home, and due to the marriage with an Indian national and actually moving to India ii. Centre of vital interests: If such an individual to stay with the husband post marriage has permanent in both the countries, such clearly indicates that the assessee person shall be considered as a resident of a permanent home is now arranged, country in which his personal and economic established and is available to such relations are closer. In this regard, OECD individual in India along with her husband commentary states that while determining and children, if any after marriage despite the personal and economic relations, due the fact she might not be owning an house in regard has to be given to family and social India as the condition as stipulated in Article relations, his occupations, political, cultural 4 is regarding availability of permanent or other activities, his place of business, the home in the state of residence and it no- place from which he administers his where stipulates that the assessee should property etc. OECD Commentary further own an house in the State of residence. states that personal acts of the individual must receive special attention in The High Court in Ireland in the case of determining the center of vital interests. O’Brien v Quigley23 has held that the interpretation of permanent home required For example, Mr. X has a permanent home in not only that abode is available, but it should country A where he has worked and where be a home and permanent. Home requires a his family reside. While retaining the first personal link which means that either house in country A, he has acquired another individual or his belongings should be there, property in country B which satisfies the test and it should be permanent in nature but not of permanent home. In this scenario, the for short duration or visits. OECD commentary states that though Mr. X has a permanent home in country A and From the above, it seems that one cannot country B, as his personal interests are determine the test of permanent home located in Country A, he would be easily and facts of each case have to be considered a resident of country A. 22 [2016] 71 taxmann.com 120 (Mumbai - Trib.) 23 [2013] IEHC 398 Volume -109 August -2023 18 | P a g e

Determination of Residential Status of a Person under DTAA The Indian Income Tax Appellate Tribunal permanent home in the second scenario) (Bangalore Bench) in the case of Shri Kumar shall be considered. However, habitual Sanjeev Ranjan24 has held that though the abode shall not be determined in a country individual is a resident in India under the where he spent more days in a year. If one domestic laws, as such individual is follows that approach, the individual does possessing personal belongings, voting not fall under the next category i.e., having a rights, driving license, dependent members, habitual abode in both the countries. In investments, social security is in USA, he order to determine the habitual abode, would be considered to have personal OECD commentary provides a test called interests in USA hence, he would be ‘frequency, duration and regularity’. considered as a resident of USA. However, relevant period of determination iii. Habitual abode: If the center of vital interest of habitual abode shall not be limited to the cannot be determined, or if such an period of test and much longer period has to individual does not have permanent in both be considered for such determination. For the countries, such an individual is Example, an individual living in country A considered as a resident of a country in from long back has moved to country B for which such person has habitual abode. shorter period for the purpose of employment in country B. In this scenario, in This step covers two types of scenarios, one order to determine the habitual abode, where individual has permanent home in instead of considering the period of both the countries, but his center of vital employment in country B, a much longer interests cannot be determined. Second, period has to be considered. where an individual does not have permanent home in either of the countries. iv. National: if such an individual has habitual abode in both the states or neither of them, OECD commentary provides a detailed such an individual is considered as a resident guidance on determination of habitual of a country of which he is a national. The abode of an individual. It states that in term national is defined in Article 3 to mean, determination of habitual abode, stay of an in the case of an individual, any individual individual both in permanent home and possessing the nationality or citizenship of a other places (in the first scenario) and other country. places (as such person does not have Volume -109 August -2023 24 [2019] 104 taxmann.com 183 (Bangalore - Trib.) 19 | P a g e

Determination of Residential Status of a Person under DTAA v. MAP: If such an individual is a national of i.e., companies incorporated outside India. It both or neither of them, the competent states that a company incorporated outside India authorities of both the countries determine is also considered as resident in India if its place the residential status of such individual. As a of effective management, in that year, is in India. last resort, if residential status of an individual cannot be determined based on 19. For the purpose of above clause, Explanation to the above tests, such individual may invoke section 6(3) of ITA states that “place of effective the mutual agreement procedure as management\" means a place where key specified in Article 25 of the treaty to management and commercial decisions that are determine the residential status by the necessary for the conduct of business of an entity competent authorities of the both the as a whole are, in substance made. In addition to countries. the above, CBDT vide its Circular25 issued guideline for determination of POEM26 in India. Residential status of a company: 15. Let us proceed to understand the provisions of 20. Which means that a company which is incorporated in India becomes resident in India. the ITA and the treaty for determining the Further, foreign company may also become residential status of a company. resident in India if POEM of such company is India. 16. Section 6(3) of the ITA states that a company is said to be resident in India in any previous year, 21. Similarly, a foreign company may become if: resident under the domestic laws of such country i. It is an Indian company; or based on the residential status of such country ii. Its place of effective management, in that thereby such a company may become resident of year, is in India. both the countries. Let us proceed to understand the determination of residential status of a 17. Clause (i) deals with the Indian company. The company under the treaty. term ‘Indian company’ has been defined under section 2(26) of the ITA to mean a company 22. As stated in para 7 above, a company is treated incorporated under the provisions of the as resident of country if company is liable to tax Companies Act. Which means that company in that country based on place of management or incorporated in India is considered as resident in other criteria of similar nature. India under the provisions of ITA. 18. The next clause deals with those companies 23. Which means that, even in the case of a company, which are not considered as Indian companies residential status shall be determined based on 25 Circular No 6 of 2017 dated 24.01.2017. 26 Place of Effective Management. August -2023 Volume -109 20 | P a g e

Determination of Residential Status of a Person under DTAA the domestic laws of a particular country. Hence, • Where its accounting record is kept; a company may become a resident of two countries as per Article 4(1). In order to eliminate • Whether such determination of residential this conflict, a tie breaker rule has been provided status would carry the risk of improper use of in the treaty for determination of residential the provisions of the treaty. status of a company. 26. The above Article further states that in the 24. Unlike in the case of individual, tie-breaker rule in absence of such agreement between the the case of company does not provide specific competent authorities, company is not entitled to test. Article 4(3) of OECD MTC states that when a any relief under the treaty except to the extent as person other than an individual becomes resident may be agreed upon by such competent of both the countries, the competent authorities authorities. of the countries shall agree determine the residential status of such a company by MAP27 Authors’ comments: route. 27. From the above analysis, it may be concluded 25. OECD Commentary on MTC provides some that the residential status of individual, in the guidance to the competent authorities for case of dual residence, cannot be determined by determination of residential status of a company using a hard and fast rule. Though the treaty under MAP. Para 24.1 of the Commentary states between two countries provides tiebreaker rule that competent authorities are expected to for determination of a residential status of an consider following factors under MAP: individual, application of such rule requires more • Where the meeting of the board or equivalent fact-based analysis, and each case has to be body are usually held; analysed based on the facts involved in such case. While determining the residential status of an • Where CEO and other senior executives individual, one can take recourse to the OECD usually carryout their activities; commentary and judicial precedents (domestic as well as foreign). • Where the senior day-to-day management of the company is caried on; 28. In the case of companies, when such a company becomes resident of both the countries, the only • Where the company headquarters are option available to such person is to invoke MAP located; under Article 25 of the treaty in order to resolve the resident-resident conflict. • Which country’s law govern the legal status of the person; 27 Mutual Agreement Procedure Volume -109 August -2023 21 | P a g e

Non-Disclosure of Foreign Assets and Consequences under Black Money Act! To tackle the issue of Black Money, Central Government has come with specific Act namely Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The main objective of the said Act is tax the undisclosed income and asset located outside India held by a resident of India. Though the Act aims to tax undisclosed asset and income outside India, there are severe penalties even for non-disclosure of legitimate earning and assets in the ITR filed by a resident in India. In this Article, concept of disclosure requirements and consequences under the Income Tax Act and Blac Money Act has been discussed. -Contributed by CA Sri Harsha & CA Narendra [email protected] Background: filing the return of income, shall disclose all 1. In order to counter the tax avoidance by foreign assets (including investment in shares and securities) and income on such foreign residents in India by way of non-disclosing the assets in Schedule FA. Non-submission of such income earned outside India, Central Schedule FA in the return attracts consequences Government has introduced Black Money Act28 under the Black Money Act. In this Article, with effective from 01.07.2015. Though the IT concept of ESOPs has been considered for better Act29 levies tax on global income earned by explaining the consequences under the IT Act residents, as there are inherent limitations for and Black Money Act. The same principles would applicability of IT Act. The objective of the Black equally apply to other nature of assets as well. Money Act is to levy tax on undisclosed foreign income/or assets located outside India. 3. It is general practice that a multi-national company allots stock to its employees or 2. Every resident and ordinarily resident, while 28 Black Money (Undisclosed Foreign Income and Assets) and 29 Income Tax Act, 1961 Imposition of Tax Act,2015 Volume -109 August -2023 22 | P a g e

Non-Disclosure of Foreign Assets and Consequences under Black Money Act! employees of its Indian subsidiary under the parts, following the life cycle of ESOPs: global/normal ESOP30 scheme. In recent times, non-reporting of such employee stock options in • Consequences & Reporting Requirements the income tax returns has created a buzz in the at the time of issue of ESOPs. industry. In some news media, it was highlighted that the Government of India was in possession • Consequences & Reporting requirements in of information that many of the residents have respect of income earned from such stocks. not disclosed such ESOPs in their returns and hinted that the non-reporting of such ESOPs in • Consequences & Reporting requirements at India is liable for a huge penalty. the time of disposal/alienation of stocks. 4. Companies may provide stock to employees 7. Before understanding the consequences and either by way of ESOPs or RSU31. The difference reporting requirement, it is required to between the ESOPs and RSU is that in the former understand the method of exchange of case, a company issues ESOPs to its employees information between two countries. In order to at pre-determined exercise price. Once the combat the possible tax evasion, G20 and OECD conditions of granting ESOPs have been satisfied countries have agreed to develop CRS32 on by the employee, after the expiry of vesting Automatic Exchange of Information. Under the period, he can exercise the option to purchase above initiative, Government of India has joined the shares of the company at the price Multilateral Competent Authority Agreement determined at the time of granting ESOPs. under which Government of India is receiving information from more than 90 countries across 5. However, in the case of RSU, a company issues the world. We believe that based on the above shares of a company to its employee at free of arrangements, Government of India would be in cost. These RSU would be vested with employee a position to obtain information of the assets subject to satisfaction of terms. Though there located outside India which are held by Indians. are conceptual differences between ESOPs and RSUs, there is no difference in taxation of A. Consequences & Reporting requirements at the underlying stocks under both the schemes. time of issue of ESOPs33: 6. In this Article, consequences, and reporting Head of income: requirements under the provisions of the IT Act 8. Section 17(2) of the IT Act states that any stock and the Black Money Act have been discussed in detail. The article has been divided into three issued by the employer to its employee at free of cost or at concessional rate is considered as perquisite in the hands of the employee and such perquisite is chargeable to tax as income 30 Employee stock option scheme. 32 Common Reporting Standard. August -2023 31 Restricted stock units. 33 Same is applicable to SRUs as well. 23 | P a g e Volume -109

Non-Disclosure of Foreign Assets and Consequences under Black Money Act! from salary. Which means that while issuing the stocks to its employees, employer would deduct tax from Year of taxability: such stocks and remit the same to government 9. The question arises is in which year such exchequer. perquisite is taxable i.e., whether it is year of 14. Though the stocks of the parent company have granting, over period of vesting period or year of been issued, the company in India being the vesting or year of exercise. employer is under the obligation to deduct tax at source. As the stocks are issued in kind, for the 10. Under Section 17(2) of the IT Act, perquisite by purpose of such TDS, employer may opt for any way of ESOP is taxable in the year in which the of the following method: option is exercised by the employee. However, in the case of RSU, as stocks are automatically • May deduct tax from the salary paid in vested, such stocks are taxable in the year of cash/bank. vesting. • May withhold/transfer some of the stock Value of perquisite: issued to employees to meet the tax 11. Once it is determined the year of taxability, it is deduction requirement. required to determine the value of perquisite. As • Collect the amount from the employee. stated above, in the case of ESOPs, the employee purchases stock at a predetermined price. In 15. Once the stocks have been issued to employees such a scenario, the difference between the and tax has been deducted on such stocks, the FMV34 as the date of exercise and amount paid employee is required to file an ITR35 and disclose by the employee for such ESOP is considered as such income as income from salary. value of perquisite. Consequences under the Black Money Act: 12. However, in the case of RSU, as such stocks are 16. These provisions are applicable to residents issued at free of cost, FMV of such RSU as on the date of vesting is considered as value of other than non-ordinarily resident in India. To perquisite. mean that these reporting requirements are not applicable to non-residents and residents but 13. Once it is determined the value of perquisite, it not ordinarily residents in India. is required to determine how to discharge tax liability on such perquisite. In this regard, section 17. However, provisions of Black Money Act are 192 of the IT Act states that the employer is applicable to non-residents, and residents but responsible for deduction of tax at source. not ordinarily residents if foreign income was earned or asset was acquired while he was a 34 Fair Market Value 35 Income Tax Return August -2023 Volume -109 24 | P a g e

Non-Disclosure of Foreign Assets and Consequences under Black Money Act! resident in India. Though the provisions of Black dividend from a company which is located Money Act are applicable to non-residents and outside India, such dividend shall be duly residents but not ordinarily residents, disclosure included in the total income in India for the in Schedule FA is applicable only to residents and purpose of payment of tax. ordinarily residents. 22. This is because, under the provisions of the IT 18. As discussed earlier, a company in India may Act, global income received by a resident in India issue stocks of a parent company located outside is taxable in India. However, such income in the India. In such case, in addition to reporting the form of dividend may also be liable to tax in the income from such stocks in India, as such stock foreign country under the domestic laws of such acquired is considered as foreign asset in the country. hands of the employee, it is required to disclose details of such assets in the Schedule FA in the 23. When such an income is liable to tax in India, it is ITR. required to determine whether there is a DTAA36 between India and respective country. 19. Such a disclosure is required to be made every year till the disposal of the asset located outside 24. If the answer to the above question is India. Failure to report such assets located affirmative, employee is eligible to claim tax paid outside India in the ITR may attract a penalty, in foreign country as credit while computing tax under section 42/43 of the Black Money Act, of liability in India under section 90/90A of the IT an amount of Rs.10,00,000/- without Act. If the answer to the above question is considering the value of asset located outside negative, an employee is eligible to claim credit India. of tax paid in a foreign country under section 91 of the IT Act. 20. Further, in addition to the above penalty, prosecution may be initiated on such person 1.1. For example, if an employee receives any with a punishment of rigorous imprisonment for dividend from a company located in USA, such a term which shall not be less than 6 months, but income is liable to tax in USA at the rate of which may be extended to 7 years. 25%37. Once the tax has been paid/deducted from such dividend income in USA, employee is B. Consequences & Reporting requirements in required to include such dividend in India and respect of income earned from such stocks: claim credit of tax paid in USA. After claiming the credit of tax paid in USA, balance tax 21. Once the stocks have been issued to an payable, if any shall be paid in India. employee, it yields a return in the form of a dividend. When the employee receives any 36 Double Taxation Avoidance Agreement 37 Article 10 of India – USA DTAA. August -2023 Volume -109 25 | P a g e

Non-Disclosure of Foreign Assets and Consequences under Black Money Act! 25. In order to claim such credit of foreign taxes, 29. Further, as such income is assessed to tax under employee is required to submit Form 67 within the Black Money Act, it may be difficult to obtain the due date specified under section 139(1).38 credit for taxes paid in foreign country. Which Further, as such income is not chargeable to tax means that such income may be taxable at the under the head salaries (as dividend is rate of 30% without any credit. Continuing with chargeable to tax under ‘income from other the above example, the employee may end up source’), company in India (employer) is not paying 55% in taxes (25% withholding done in under any obligation to deduct tax in India unless USA and 30% under Black Money Act in India). such income is declared by the employee for deduction of tax at source under section 192. 30. In addition to the tax payable at the rate of 30% on ‘undisclosed foreign income’, a penalty of 26. Hence, it is the responsibility of the employee to 300% of tax may be levied under the Black make sure that the dividend income is included Money Act. in the total income for the purposes of tax computation in India. 31. Further, any failure to disclose such dividend income in Schedule FA (even such income is 27. Further, in certain scenarios, instead of paying included in total income in India) may attract a the dividend into the bank account of the penalty of Rs.10,00,000 under Section 42/43 of employee in India, such dividend received by the the Black Money Act and imprisonment as stated employee may be re-invested into shares of the above. listed parent company. In such a case, dividend income shall be reported as ‘income’, and C. Consequences & Reporting requirements at the purchase of shares from such dividend re- time of disposal/alienation of Stocks: investment shall be reported as ‘asset’ under Schedule FA. 32. Finally, an employee may dispose of the stock and receive amount into his bank account. When Consequences under the Black Money Act: the shares of a company have been transferred 28. If any dividend income is not included in the total by the employee, any gain arising from such transfer is considered as capital gains. income while filing the ITR, such an income may be considered as an ‘undisclosed foreign income’ Head of income: under the Black Money Act. Once the income is 33. Such gain/loss arising from the transfer of stock considered as an ‘undisclosed foreign income’, such income is assessed to tax under the Black received is chargeable to tax in the hands of the Money Act at the rate of 30%39. 38 However, CBDT provided a relaxation stating that such year provided the return if filed under section 139(1) or Form 67 may be filed within the end of relevant assessment section 139(4). 39 No additional cess/surcharge 26 | P a g e Volume -109 August -2023

Non-Disclosure of Foreign Assets and Consequences under Black Money Act! employee as income from capital gains. Further, 38. For the purpose of value of capital gains, the in order to compute tax liability, it is required to amount received from the transfer of shares is classify such gain into short-term capital gains considered as sale consideration and value taken and/or long-term capital gains. for the purpose of perquisite (i.e., FMV as on the date of exercise) would be considered as cost of 34. Short term capital gain arising from the transfer acquisition. of equity shares listed in any stock exchange in India is chargeable to tax at the rate of 15%. If 39. Accordingly, the difference between sale such shares are not listed on any recognized consideration and value of perquisite is stock exchange in India, such short-term capital considered as capital gains chargeable to tax gain is chargeable to tax at applicable slab rates. under the head capital gains. 35. Similarly, long term capital gain is chargeable to 40. For example, an employee receives stocks of tax at the rate of 20%40 with indexation benefit. value Rs.1,000 and pays the tax on such stocks as However, gain arising from transfer of equity perquisite under the head salary (tax is deducted shares listed in any recognized stock exchange in by the company). Subsequently, such stocks India, such long-term capital gain is chargeable have been sold for a price of Rs.1,200. Hence, the to tax at the rate of 10% without indexation (or difference of Rs.200 is considered as gain 20% with indexation). chargeable to tax in the hands of the employee. 36. In the case of shares listed in any recognized Consequences under the Black Money Act: stock exchange in India, if such shares are held 41. The consequences and reporting requirements for a period not more than 12 months, such gain is considered as short-term capital gains. under the Black Money Act are the same as However, in the case of shares which are not discussed in para 27 – 30. listed in any recognized stock exchange, the period of holding for determination of capital D. Case Study: gain is 24 months. 42. In certain cases, it is observed that the company, Year of taxability: in order to meet the tax deduction requirements 37. Such capital gain arising from the transfer of under section 192, is transferring part of stock issued to its employees. Let us proceed to shares is chargeable to tax in the year in which understand the tax consequences of such a case. such transfer took place. 43. For example, Mr. X is an IT employee working Value of perquisite: with a global corporate. Mr. X has been granted 40 Provisions of section 112A are not applicable if STT is not Volume -109 August -2023 paid. 27 | P a g e

Non-Disclosure of Foreign Assets and Consequences under Black Money Act! stocks of a parent company located outside India 46. Further, in this case, as the company is under the employee stock reward scheme. transferring 30% of shares, such transaction has to be reported as ‘capital gains’. This reporting • Total stocks granted 1,000 units. has to be made whether or not any gain received by the employee. • Stocks vested during the current year 200 units. 1.2. For example, if share is transferred at USD 1,100 per share, the difference of USD 100 • FMV of such stock as on the date of vesting needs to be reported as gain under the head is USD 1,000/-. capital gains. If the same is transferred for USD 1,000, though there is no gain, such transaction • In the above situation, the company (Indian shall be reported under the capital gains as NIL. subsidiary) being an employer needs to deduct tax at applicable slab rate. For the 47. In these circumstances, as the company is sake of understanding, the tax rate is deducting the taxes, employees are under the considered as 30% (flat rate). assumption that no additional reporting or disclosure is required. However, the above • In order to meet the tax liability, the reporting and disclosure shall be made. company automatically transfers 30% of the stock and discharges its TDS obligation. 48. Further, the foreign company is issuing a dividend in respect of shares held on the • The company instructs to deposit 200 units recorded date. Such dividend is also required to into the stock account of the employee and be reported in India for the purpose of tax. transfers 60 units (30%) on the same day or However, the employee can claim credit of taxes the next day. paid in the foreign country by submitting the Form 67. • Accordingly, tax of 30% would be deducted by the company in India and duly issues 49. Non-reporting and/or disclosing of assets and Form 16 to its employee. foreign income (capital gains and dividend) attract severe consequences under the IT Act 44. In the above, in the first instance, USD 2,00,000/- and Black Money Act as discussed in the above i.e., USD 1,000*200 units is considered as paras. perquisite taxable under the head salary. 50. If any person failed to report or disclose the 45. Hence, such income is to be included in the total above-mentioned assets or income, it is income while filing the ITR in India. In addition to advisable to file revised return (for the AY 2023- the above, as Mr. X holds assets in a foreign 24) or updated return [for the previous years country, such assets shall be duly reported in the Schedule FA. Volume -109 August -2023 28 | P a g e

Non-Disclosure of Foreign Assets and Consequences under Black Money Act! subject to time limits and subject to satisfaction such person every year. Hence, such person is of conditions provided under section 139(8A)] in required to report stocks held by such person order to comply with the reporting and every year till the disposal of such asset. disclosure requirements under the IT Act and Black Money Act. 55. Whether employee is required to report stock received under the previous employment? E. FAQs: The above reporting requirements are 51. Who is under the obligation to comply with the applicable to every resident and hence such reporting and disclosure requirements? employee, whether or not he continues to be in employment or not, is under the obligation to The above reporting and disclosure comply with the above reporting requirements. requirements are to be made by every resident and ordinarily resident. 56. A person retired from the employment and does not have taxable income in India but holding 52. Whether a deemed resident under section 6(1A) shares acquired under ESOPs during the is required to comply with the above employment. Whether such a person is required requirements? to file ITR and disclosure those stocks in Schedule FA? No, as deemed residents are considered as residents but not ordinarily residents, the above Under the provisions of IT Act, every person reporting requirements may not be applicable. whose income exceeds the maximum amount is under the obligation to file ITR in India. However, 53. When a person acquires stock while he was a proviso to section 139(1) states that in addition non-resident. Whether such a person is required to the above-mentioned person, a person who is to make any disclosures? holding any asset or beneficial interest outside India is liable to file ITR in India. Hence, such a Though the stocks have been acquired by an person is required to file ITR in India and disclose individual while he was a non-resident, such assets in Schedule FA. person is required to disclose those assets under Schedule FA immediately once such person 57. What are the major consequences under the becomes resident and ordinarily resident in Black Money Act if any resident fails to comply India. with the above requirements? 54. Whether a resident is required to report those When any foreign income is not included in the stocks every year? Or only in the year of total income, such income is considered as acquisition? undisclosed foreign income and taxable at the rate of 30% (without any deductions) and Under the Schedule FA, residents are under an obligation to report any foreign assets held by Volume -109 August -2023 29 | P a g e

Non-Disclosure of Foreign Assets and Consequences under Black Money Act! penalty may be levied at the rate of 300% of the proceedings are not automatic but can be tax payable. initiated only when there is an intentional failure on the part of the assessee41. Further, interest under section 234A, section 234B and section 234C of the IT Act would be Considering the above, one may take a stand levied at the time of recovery of tax payable that since ESOPs are disclosed by way of under the Black Money Act. withholding of tax by the employer, it amounts to adequate disclosure and compliance under 58. If tax is deducted on ESOPs and included the the provisions of Black Money Act. same in the ITR, whether the penalty is levied for non-disclosure of assets in the Schedule FA? 59. What is the time limit to issue a notice under the Black Money Act to assess foreign undisclosed Provisions of Section 42/43 of the Black Money income? Act states that any person failed to disclose or file return of income despite holding foreign Unlike the IT Act where the time limit is 3 years assets or failure to disclose such foreign asset is to reopen the assessment (6/10 years in certain liable to penalty of Rs.10,00,000/-. cases), there is no time limit to issue a notice under the Black Money Act. However, considering the spirit behind the Black Money Act, one can argue that disclosure is 60. Can a person file a revised or updated return to paramount, whether in the specified schedule in comply with the above requirements? the ITR or in the total income. Since disclosure is made to the tax authorities, it can be pleaded A person may file a revised return at any time on that the same should be seen enough or before 31st December of the relevant compliance under the Black Money Act. assessment year. In such a revised return, the employee may comply with the above reporting Further, in certain cases, taxpayers whose total requirements. income exceeds a prescribed threshold, they are mandated to file the statement of assets and Further, a person may file updated return within liabilities. In such statements, the taxpayers a period of 2 years from the end of relevant (employees) would have invariably disclosed the assessment years (additional tax is required to ESOPs/underlying shares as investments. This be paid under updated return). should also be considered as adequate disclosure for the purposes of the Black Money However, an updated return cannot be filed in Act. Further, judicial fora have held that penalty certain circumstances which inter alia includes where any proceedings under the IT Act are 41 Read our Article Penalties under Black Money Act - ‘must‘ Volume -109 August -2023 or ‘may’? - Taxmann 30 | P a g e

Non-Disclosure of Foreign Assets and Consequences under Black Money Act! pending or completed for the assessment year, 62. Are penalties under the Black Money Act qua or department has received any information undisclosed asset or undisclosed income or qua from the foreign country under the agreement each year? referred to in section 90/90A and same has been communicated to the assessee. Under the Black Money Act, different penalty provisions are applicable for different non- Though the notice issued to employees does not compliances. specifically mention that the notice is a consequence to the information in possession For example, section 41 of the Black Money Act received by them under the arrangements deals with the penalty when undisclosed asset or referred in Section 90/90A, the tax authorities income is assed to tax. Section 42/43 deals with may harp on the same and there is a possibility the failure to file return of income despite for rejecting the updated return. holding foreign assets/income and/or failure to make disclosure of foreign assets and income in 61. When the income has been assessed to tax the ITR. The above question arises with respect under the Black Money Act, whether same is to failure to disclose such foreign assets in taxable under the provisions of the IT Act? And Schedule FA in the ITR as schedule FA is required penalties levied under both the Acts? to report every year. Section 4(3) of the Black Money Act states that In this regard, though the Black Money Act is once the income or asset is assessed to tax under silent, as a legal prudent, penalty cannot be the provisions of the Black Money Act, same levied for each year for failure to make shall not be subject to tax under the provisions disclosure in Schedule FA. of the IT Act. This is because, as the Black Money Act has been brought in to deal with special 63. When disclosure of asset is made (through TDS assets/income, it should prevail over general route of Statement route), is the income arising laws. Further, the Delhi Tribunal in the case of from such an asset to be separately disclosed? Ashok Kumar Singh42 has held that once the Is it adequate that when an asset is shown, the provisions of Black Money Act has been invoked, income (which springs out of the asset) need not revenue shall not invoke provisions of IT Ac to be shown? deal with the same set of facts. Hence, once the provisions of Black Money Act have been Scope of Black Money Act has been specified invoked, for the same set of facts, provisions of under section 4 read with section 2(12) under IT Act may not be invoked. which any income from a source outside India which is not disclosed in the ITR shall be treated 42 [2023] 151 taxmann.com 207 (Delhi - Trib.) Volume -109 August -2023 31 | P a g e

Non-Disclosure of Foreign Assets and Consequences under Black Money Act! as undisclosed foreign income. However, the Black Money Act presumes such culpable mental state of the assessee, and such Mere disclosure of foreign assets is not sufficient person has to prove in the court of law that there but income from any source outside shall also be is no culpable mental state. disclosed in the ITR. Here, disclosure does not mean disclosing the assets/income in the Given the above, in certain circumstances, when Schedule FA but including such income in the the foreign income is duly included in the ITR and total income for the purpose of computation of tax has been paid but such income is not tax liability in India. Hence, there are high disclosed in the Schedule FA, these failures do chances that foreign income which is not not seem to be valid grounds for initiation of included in the total income in India to be prosecution. However, when the assessee considered as undisclosed foreign income and willfully fails to include the foreign income in the thus attracting the provisions of Black Money total income, there are high chances of initiation Act. of prosecution. 64. Can the authorities attach a bank account pending conclusion of proceedings? Modes of recovery under the Black Money Act has been clearly provided under section 30- section 40. The said recovery proceedings starts only when the notice of demand under section 13 is issued by the tax authority. Hence, it may not be possible to attach the bank account unless the proceedings under the Black Money Act have been completed and notice of demand is issued. 65. Can the authorities in a routine manner initiate Volume -109 August -2023 prosecution proceedings? From the reading of various provisions of the Black Money Act, it can be understood that these provisions are very stringent in nature. Initiation of prosecution has been provided under Chapter V of the Black Money Act which states that prosecution may be initiated when there is willful violation of the provisions of the Act. 32 | P a g e

Significant Disclosures in Income Tax Returns by an Individual An individual who has earned income which is taxable under the provisions of the Income Tax Act, 1961 is required to file a return of Income in India. While submitting the return of income, a person is required to submit details of income earned and details of tax liability on such income. Such an individual, in addition to submission of details income and tax, is required to make certain specific disclosures and required to submit proper information to the Government of India. Non-disclosure or failure to submit specific information may attract severe penal provisions under the Income Tax Act,1961, Black Money Act,2015 etc. In this Article, significant disclosures that are required to be made in the return of income has been discussed. -Contributed by CA Lokesh and Kanakaraj [email protected] Introduction reduces the burden of collecting and organizing 1. In India, individuals who earn taxable income as numerous documents. However, it is essential to note that the absence of attachments does not per the provisions of ITA43 are required to file imply a relaxation of compliance standards. On their ITR44 electronically. ITR is a self-declaration the contrary, taxpayers must retain all the form filed by these individuals before the ITD45 relevant documents and receipts as supporting not only to report their source(s) of income but evidence for at least six years from the end of the also the assets and liabilities being held by them. assessment year. The ITD reserves the right to These ITRs are attachment-free forms, which summon, and such individuals must be prepared makes the life of the individuals hassle-free as to furnish necessary documents if requested. they no longer need to attach supporting documents while filing their returns. This 2. However, while filing ITRs, a considerable number simplification streamlines the process and of individuals are, intentionally or 43 Income Tax Act, 1961 45 Income Tax Department 44 Income Tax Return Volume -109 August -2023 33 | P a g e

Significant Disclosures in Income Tax Returns by an Individual unintentionally, failing to disclose and report mentioned conditions is fulfilled by the some of the significant details, which individual, then they are obliged to file the ITR subsequently leads to receiving notices from the irrespective of their income. Income Tax department. The point to be noted a. Individual, being a beneficiary of any asset here is that failing to file income tax returns or filing but inaccurately reporting income and (including any financial interest in any entity) assets can lead to severe legal implications. It located outside India. may result in penalties, fines, audits, and even b. Aggregate deposit exceeds Rs 1 crore in one or legal proceedings. By fulfilling the responsibility more current accounts. of filing returns and accurately reporting the information, individuals can avoid legal c. Aggregate expenditure exceeds Rs. 2 lakhs for complications along with the associated financial travel to a foreign country. and reputational risks. In this article, we will shed light on the crucial pieces of information that d. Aggregate expenditure exceeds Rs. 1 lakh on must be disclosed while filing income tax returns. consumption of electricity. Before diving directly into the core topic, let us understand who are mandatorily required to file e. Any person who has satisfied the conditions as their ITRs and which forms are applicable to may be prescribed under section 139(1)(iv) which individual. • If total sales, turnover or gross receipts, in Persons required to file ITR: the business exceeds Rs. 60 lakhs during 3. An individual whose income does not exceed the the previous year. or basic exemption limit is not required to file their • If his total gross receipts in profession ITR. In other words, Income Tax Returns must be exceeds 10 lakhs during the previous year. filed by individuals whose total income exceeds the basic exemption limit prescribed by the ITA. • If the aggregate of tax deducted at source The threshold for this exemption may vary from and tax collected at source during the year to year. However, if any of the below- previous year is Rs. 25,000 (50,000 for resident senior citizen) or more • If the deposits in one or more savings bank account of the person, in aggregate, is Rs. 50 lakhs or more, during the previous year. 34 | P a g e Volume -109 August -2023

Significant Disclosures in Income Tax Returns by an Individual Glimpses of ITRs applicable to an individual: 4. Individual must choose an appropriate ITR form to disclose his source of income as follows: S No Form Conditions 1 ITR 1 A resident individual whose income ≤ Rs. 50 Lakhs from salary/pension, one house property, and income from other sources. 2 ITR 4 A resident individual whose income ≤ Rs. 50 Lakhs from salary/pension, one house property, income from other sources, and business/professional income which is eligible for presumptive scheme. 3 ITR 2 An individual whose income > Rs. 50 Lakhs from salary/pension, more than one house property, income from other sources or having any or all the following incomes: - Capital gains, foreign income/asset, crypto income (capital in nature), holding directorship in a company or holding unlisted equity shares. 4 ITR 3 An individual whose income is as mentioned in ITR – 2 and having any or all the following incomes: - Business/Professional income, crypto income (other than capital in nature) or is acting as a partner in a firm(s). Opting of New Tax Regime under section generated upon successful submission of the 115BAC: form which needs to be disclosed in the ITR. In 5. A new tax regime under section 115BAC has been other words, individuals (for new regime of introduced by the government through Finance taxation) who are required to file their ITR using Act 2020 in order to provide reduced tax rates to Form ITR-3 or ITR-4 must first ensure successful the individual subject to certain conditions. submission of Form 10-IE. Only after successfully However, when compared to the old tax regime, completing and submitting Form 10-IE can they certain deductions related to various allowances proceed to file their income tax return using the and investments are not allowed. Further, some respective ITR forms. of the provisions of this section are being amended from time-to-time to cope with the Persons governed by Portuguese Civil Code inherent limitations and to encourage every under section 5A: individual to opt for their income computation 7. While filling the ITR Form, one may come across under this new tax regime. a question ‘Are you governed by Portuguese Civil Code under section 5A?’ Under this section, the 6. An Individual who wishes to opt for a new tax income of every eligible individual and their regime having Income from business or spouse shall be equally apportioned between profession need to furnish Form 10 IE through the them under each head except salary income. income tax portal before filing their ITR. A 15 – Each such spouse shall only disclose their share of digit acknowledgement number will be income in their individual ITR. Additionally, 35 | P a g e Volume -109 August -2023

Significant Disclosures in Income Tax Returns by an Individual Schedule 5A needs to be filled up with the evasion cases and to ensure that income from apportionment information. However, these such properties is taxed appropriately. There are provisions shall be applicable only to the various scenarios under which an individual can residents of Goa, and union territories of Daman be deemed to be the owner of the property, such and Diu and Nagar Haveli. Before disclosing their as: income as per this section, such individuals are required to update their respective profile by a. Transfer to Spouse: If an individual transfers selecting the applicability of the code. their property to their spouse otherwise than for adequate consideration (except in cases of Directorship in a company: a transfer in connection with an agreement to 8. Every individual serving as a director in a live apart), the individual will be deemed the owner of that property. company is obliged to provide the details including the name of the company, Permanent b. Transfer to Minor (other than minor married Account Number (PAN), Director Identification daughter): If an individual transfers their Number (DIN) of the individual. Additionally, property to their minor child otherwise than individuals must specify whether the shares of for an adequate consideration, they will be the company they are associated with are listed considered the deemed owner of that on a recognized stock exchange or not. property. Partnership details in a firm: c. Joint Ownership: In cases of joint ownership 9. If an individual is a partner in any firm, the where one of the co-owners does not contribute to the property's cost, the disclosure of relevant information in ‘Schedule IF’ contributing co-owner is deemed to be the regarding that firm becomes mandated along owner of the entire property. with the closing balance of capital as on 31st March. This also includes Name and PAN of the d. Beneficial Interest: If an individual has a firm, percentage of profit sharing in the company beneficial interest in a property, then they and the amount of share in profits. may be deemed owner of that property for income tax purposes, even if the legal title is Deemed Ownership: held by someone else. 10. Deemed Ownership refers to an individual who is e. Holder of an Impartible Estate: Where an considered to be the owner of the property for estate cannot be divided or partitioned among income tax purposes, even if such individual does the family members, then income from such not possess any legal ownership on such estate can be clubbed and taxed in the hands property. This concept follows the rule – of the holder. ‘Substance Over Form’ which has been dealt with under section 27 in order to reduce the tax Volume -109 August -2023 36 | P a g e

Significant Disclosures in Income Tax Returns by an Individual Virtual Digital Assets: forward to subsequent years for set-off against 11. Virtual digital assets, popularly known as the future profits from the same head. cryptocurrencies, are a form of digital or virtual 14. However, there are certain rules and restrictions currency that use cryptography for secure provided under IA. The ITA has mandated to financial transactions and control the creation of disclose the figures of loss incurred during the new units. Unlike traditional currencies issued by year in ‘Schedule-Current Year Loss Adjustment governments and central banks, cryptocurrencies (CYLA)’. Information relating to such losses which operate on decentralized networks based on are brought forward and set off needs to be blockchain technology. In order to tax the income disclosed in ‘Schedule – Brought Forward Loss from such virtual digital assets, the Government Adjustment (BFLA)’. These brought forward of India has inserted a new section 115BBH to tax losses can be carried forward for 4-8 years gain arising from those assets. depending upon the type of losses and shall be disclosed in ‘Schedule – Carry Forward of Losses 12. While reporting the income from such digital (CYL)’. assets, an individual is required to provide details of date of acquisition and cost, date of transfer ICDS: and consideration, head of income, Income from 15. Income Computation and Disclosure Standards transfer of virtual digital assets in Schedule virtual digital asset. (ICDS) are issued by the Central Board of Direct Taxes (CBDT), which provide guidelines for Set-off and carry forward of losses: computation of taxable income and disclosure of 13. Set-off of losses allows the individual taxpayer to certain items for the purpose of computation of income tax. These standards have been adjust their losses from one head of income with introduced to maintain uniformity and the profit earned in another head of income, consistency while computing the taxable income however, within the same financial year. When a of an individual. ICDS lays down only the taxpayer has losses under a particular head of principles which cover the various aspects like income such as business or profession, then accounting policies, revenue recognition, those losses can be set-off against the income construction contracts, inventory valuation, earned in another head like capital gains or other tangible and intangible assets, effects of changes sources. Whereas carry forward of losses allows in forex rates, government grants and borrowing the individual taxpayers to offset their losses of costs. one financial year against the profit of another upcoming financial year(s) within the same head 16. These principles need to be adopted by the of income. When an individual taxpayer’s total individual while computing their taxable income. income shows a loss under a particular head of However, these standards are to be followed by income, the unadjusted loss can be carried 37 | P a g e Volume -109 August -2023

Significant Disclosures in Income Tax Returns by an Individual those individuals having income under the heads details like name of the person of income to be ‘Profit and gains from business or profession’ or clubbed, PAN/Aadhaar, relationship with the ‘Income from other sources’ and who are liable individual, amount of income in ‘Schedule – for tax audit under section 44AB. Such individuals Specified Person Income (SPI)’. are required to disclose the information in Schedule ICDS along with the effects of ICDS Disclosure of Assets and Liabilities: adjustment on the profit. 19. The government has taken many measures to Disclosure while claiming deductions under track financial transactions and prevent money section 80G: laundering and circulation of black money. One of 17. The government has always extended its full such measures is that it has mandated to disclose support towards charitable services and provides the details of their assets and liabilities, such as tax relief by allowing deductions on the amounts land and buildings, bank deposits, shares, donated. Under section 80G, every individual securities, jewellery, bullion, vehicles, insurance whether resident or non-resident, is eligible for policies, vehicle loan, personal loan, housing loan claiming deductions ranging from 50 percent to etc., in ‘Schedule – Asset & Liabilities (AL)’ when 100 percent of the amounts donated. In such an individual’s total income exceeds Rs 50 lakhs. cases, Schedule 80G needs to be filled-up in the ITR with details like Name, PAN and address of 20. However, if such individual is classified as a non- the donee, total amount of donation along with resident or resident but not ordinarily resident, the break-up on amounts paid in cash or any only the details of assets and liabilities located in other mode and the amount of donation eligible India may be disclosed. for deduction. Further, it has mandated every eligible donee to issue certificate of donation in Disclosure of investment in shares of a private form 10BE and relatively a new column ‘ARN’ i.e., limited company shares: Donation Reference Number has been 21. If an individual is holding unlisted shares of any introduced in the Schedule 80G by the company registered under the Companies Act, government. 2013, then the details of such shares must be disclosed. This disclosure is required even if such Specified Person Income: unlisted shares are held at any time during the 18. There is special provision in the ITA, that financial year. Details such as PAN of the company, opening balance of shares, shares whenever a minor child has earned income (not acquired and transferred during the year, and due to their own talent), the income of such closing balance of shares must be reported. minor child needs to be clubbed in the hands of such parent whose total income is higher. In such cases, the ITA has mandated to disclose the 38 | P a g e Volume -109 August -2023

Significant Disclosures in Income Tax Returns by an Individual Disclosure related to foreign assets and foreign is mandated to file ‘Schedule – Foreign Source of income: Income (FSI)’ along with ‘Schedule – Tax Relief 22. Many countries have implemented stringent (TR)’, in order to claim tax relief against that reporting requirements and signed multiple income in India. In this Schedule, the details of agreements under various acts for exchange of income, which is accruing or arising from any financial information to reduce the tax evasion source outside India needs to be reported. The cases, to combat money laundering and to relevant head of income under which such promote global transparency. As a part of this, foreign source income has been reported should residents are required to disclose the ownership also be duly mentioned. Country code and of any foreign assets or beneficial interests held Taxpayer Identification number in the country in any foreign assets/entities in ‘Schedule – where tax has been paid is to be filled-up. Foreign Assets (FA)’. This helps the authorities in tracking and assessing the accurate tax liability, 25. Furthermore, if any taxes are being paid on the leaving no room for laundering of money and in foreign source of income in another country, and preventing financial crimes. However, non- tax relief is being claimed in India under the residents or resident but not ordinarily residents provisions of the Double Taxation Avoidance are not required to file Schedule FA as it is Agreement (DTAA), it is crucial to specify the applicable only to resident individuals with relevant article of the applicable DTAA in the tax foreign assets. return. 23. The foreign assets can be foreign custodial 26. Individual being a non-resident is required to accounts, foreign equity and debt interest, submit additional information related to dividend foreign depository accounts, shares held in any income earned by such non-resident from Indian listed or foreign company, cash value/surrender companies, dividend income of Foreign value of foreign insurance contract, trusts Institutional Investors (FIIs), and dividend income created under any foreign country laws in which subject to tax as per DTAA rates in ‘Schedule – such individual is a trustee. A point to be noted is Other Sources (OS). Individuals are required to that these amounts should be mentioned after provide specific details such as amount of converting them into Indian rupees. For the income, country name and code in which such purpose of filling this schedule, assets or liabilities NRI is a resident, article of DTAA, rate as per the held at any time during the calendar year ending DTAA, section under which such income is as on 31st Dec shall be taken. governed, rate of income tax. 24. However, resident individual having foreign Volume -109 August -2023 source of income which is taxable in India and has paid tax in foreign country under the foreign laws, 39 | P a g e

Acquisition of Immovable Property in India by a Non-Resident - FEMA Investment in immovable property is one of the best investment plans for any person. When a person being non-resident outside India wishes to invest in immovable property, the question arises is ‘Whether he is allowed to make investment in immovable properties in India? What are the conditions for such an investment and how to repatriate the amount post transfer? Further, a person may acquire the property by inheritance or by gift from other resident/non-resident. In such a case, a question may arise as to what are conditions and procedure for such acquisition? In this Article, conditions and procedure for acquisition, holding and transfer of immovable property in India by a non-resident individual are discussed in detail. -Contributed by CA Sri Harsha, CS D V K Phanindra & CA Narendra [email protected] 1. An individual may leave India for various purposes residents (individuals) has been discussed in which inter alia includes for the purpose of detail. employment or business. While such individual is earning income outside India, one of the 2. Before understanding the procedure for investing investment options that they explore is investing in any immovable property in India, we need to in immovable property being a land or building in understand certain definitions: India. Central Government also encourages the • Resident outside India: section 2(w) of the non-residents of India to invest in various assets FEMA defines the term ‘person resident viz. shares and securities, immovable property outside India’ to mean a person who is not and other securities in India as India receives resident in India. Section 2(v) defines the convertible foreign exchange into India. Unlike term ‘person resident in India’ to mean a the investment in securities, investment in person residing in India for more than 182 immovable property needs close monitoring. days during the course of the preceding Accordingly, investment in immovable property is financial year but does not include— allowed subject to certain conditions and A. a person who has gone out of India or restrictions. In this Article, the concept of who stays outside India, in either case— investment in immovable property by non- a) for or on taking up employment 40 | P a g e Volume -109 August -2023

Acquisition of Immovable Property in India by a Non-Resident - FEMA outside India, or be resident of India under Income Tax Act, and b) for carrying on outside India a resident outside India under FEMA. business or vocation outside India, or • Non-Resident Indian (‘NRI’): Non-Resident c) for any other purpose, in such Indian means a person resident outside India who is a citizen of India. circumstances as would indicate his intention to stay outside India for an • Overseas Citizen of India (‘OCI’): OCI means uncertain period; a person resident outside India who is B. a person who has come to or stays in registered as an Overseas Citizen of India India, in either case, otherwise than— Cardholder under Section 7(A) of the a) for or on taking up employment in Citizenship Act, 1955. India, or b) for carrying on in India a business or Part I: Acquisition of immovable property by a vocation in India, or person resident outside India: c) for any other purpose, in such 4. Section 6 of the FEMA46 deals with the capital circumstances as would indicate his account transactions. Section 6 (2A) of FEMA intention to stay in India for an empowers the Central Government to regulate uncertain period. capital account transactions not involving debt 3. From the above definition, it can be understood securities. Further, section 6(5) states that a that in order to determine the residential status person resident outside India may hold, transfer of a person, the period of stay in the preceding or invest in any immovable property in India, if years needs to be considered. Further, in addition such property is acquired when such person was to the period of stay, the purpose of leaving India a resident in India or inherited from a person who also needs to be taken into account for was a resident in India. determination of residential status. For example, an individual who leaves India for the purpose of 5. Given the above, there are provisions which deals employment outside India becomes resident with the acquisition, holding and transfer of outside India though such person stays in India immovable property in India by a person resident more than, for 182 days during the preceding outside India. Let us proceed to discuss year. Whereas under the provisions of the Income procedure to be followed for making investment Tax Act,1961, period of stay during the current immovable property in India by non-residents. years needs to be considered. Whereas under the provisions of the Income Tax Act,1961, period of 6. In exercise of the powers conferred under section stay during the current year needs to be 46 (2) (aa) and (ab), the Central Government has considered. So, in certain scenarios, a person will notified FEM (Non-Debt Instruments) Rules, 46 Foreign Exchange Management Act, 1999 Volume -109 August -2023 41 | P a g e

Acquisition of Immovable Property in India by a Non-Resident - FEMA 2019, as amended from time to time, which inter considered as foreign direct investment, as the alia deals with investment in immovable property same is not in to any entity in India, and in India. accordingly, Hence, there is no specific compliance reporting compliance for the 7. A person may acquire the immovable property in investment in immovable property in India by an either of the following ways: NRI or OCI. • Purchase of immovable property for cash. • Acquisition of immovable property by gift. Acquisition of immovable property by gift: • Acquisition of immovable property by 10. An NRI or OCI is eligible receive an immovable inheritance. property by way of gift from any person resident Purchase of Immovable Property: in India or from NRI or OCI who is a relative of 8. An NRI or OCI is eligible to acquire an immovable such person as defined under section 2(77) of the Companies Act,2013. However, acquisition of property in India by way of purchase subject to immovable property being an agricultural land or following conditions: farmhouse or plantation property by way of gift is prohibited. • Investment in agricultural land or farmhouse or plantation property is Acquisition of immovable property under prohibited. inheritance: 11. An NRI or OCI is eligible to receive an immovable • Funds for purchase of such immovable property by way of inheritance from a person property to be purchased may be made resident outside India who had acquired the out of funds received in India by way of property in accordance with the provisions of the inward remittance from outside India or FEMA Regulations at the time of acquisition. funds held in any non-resident account maintained by such person in India. 12. An NRI or OCI is eligible to receive an immovable property by way of inheritance from a person • Payment shall not be made either by resident in India. On a careful reading of above, it traveller’s cheque or in foreign currency can be inferred that there is no restriction on NRI notes. or OCI from inheriting immovable property being an agricultural land or farmhouse or plantation 9. When funds are received from outside India, in property in India either from a person resident order to make investment in immovable property outside India subject to certain conditions and in India, NRI or OCI needs to provide ‘inward also from a person resident in India. remittance purpose code’ to the AD Bank. For this purpose, NRI or OCI may provide ‘P0099’ as inward remittance purpose code to its AD Bank. Further, such investment by individuals is not 42 | P a g e Volume -109 August -2023

Acquisition of Immovable Property in India by a Non-Resident - FEMA The pictorial presentation of the above discussed provisions in relation to acquisition, is as below: Part II: Transfer of immovable property by a as defined under section 2(77) of the Companies person resident outside India: Act. 13. An NRI or OCI may transfer any immovable property in India to a person resident in India. This Repatriation of sale proceeds of immovable immovable property may include immovable property: property acquired when such persons was a 15. Once the NRI/OCI transfers any immovable resident in India, purchased from any person, property, next question that arises is what are the received as a gift or inheritance. conditions for repatriation of funds to outside India? This question needs to be answered 14. However, in the case of transfer of immovable considering the source of acquisition of such property to another NRI/OCI, such NRI/OCI may immovable property in India. transfer any immovable property other than agricultural land, farmhouse or plantation Regular Repatriation: property. Further, an NRI/OCI may transfer the 16. If the amount of consideration has been paid in immovable property under a gift only to a relative foreign exchange received through banking channels or out of funds in NRE account or FCNR 43 | P a g e Volume -109 August -2023

Acquisition of Immovable Property in India by a Non-Resident - FEMA account, then NRI or OCI is allowed to repatriate such immovable property is deemed to be sale proceeds to outside India. acquired with foreign funds and hence, such NRI or OCI is allowed to repatriate funds to outside Remittance under USD 1 million scheme: India. When a person acquires immovable property under any modes specified under section 6(5), Restriction/limit in repatriation in some cases: i.e., was acquired, held or owned by such person In the case of repatriation of sale proceeds from when he was resident in India or inherited from a sale of house properties, such repatriation is person who was resident in India, then such a restricted to two residential house properties. person is not allowed to repatriate sale proceeds to outside India. However, such a person may 18. In order to make remittance under the USD 1 remit the amount under ‘Foreign Exchange million scheme or repatriation of sale proceeds, Management (Remittance of Assets) Regulations, AD Bank may request the NRI or OCI to submit 2016’ popularly known as USD 1 million Form A2 along with the declaration stating that remittance scheme. the amount is eligible to remit or repatriate as the case may be. In addition to the above, AD Bank 17. Further, if such NRI or OCI47 acquires immovable insist upon certificate for discharging of income property with the borrowed funds and repayment tax liability in India. Further, as the amount is not of such loan has been made from inward repatriated under the LRS scheme, TCS provisions remittance or NRE account and FCN account, then under section 206C(G) are not applicable48. The pictorial presentation of the above discussed provisions in relation to repatriation, is as below: 47 Under the erstwhile regulations, PIO is eligible to acquire 48 For a detailed understanding of remittances under the these immovable property in India. Hence, such person is also regulations and LRS, read our Article at Remittance of Assets allowed to repatriate funds if such property is sold after the Regulations vs Liberalised Remittance Scheme - A Comparison commencement of current regulations. under FEMA and Income Tax - Taxmann 44 | P a g e Volume -109 August -2023

Acquisition of Immovable Property in India by a Non-Resident - FEMA Acquisition by other persons: approval from the Ministry of External Affairs. 19. Acquisition by spouse of NRI or OCI: In addition 22. Acquisition of immovable property for business to the NRI or OCI discussed above, spouse of NRI activities: A person being a resident outside is also eligible to invest in immovable property in India, who has established any branch or office India subject to the following conditions: any other place of business in India (other than liaison office), may acquire immovable property • Investment can be made in any which is necessary or incidental to the activity immovable property other than carried on in India subject to following conditions. agricultural land, farmhouse or • Such a person shall file Form IPI within plantation property. the 90 days of acquisition. • Acquisition by the persons of Pakistan or • Such property shall be acquired jointly Bangladesh or Sri Lanka or Afghanistan or with his/her NRI or OCI spouse. China or Iran or Hong Kong or Macau or Nepal or Bhutan or Democratic People’s • Consideration shall be made either by Republic of Korea requires prior approval inward remittance or any non-resident of RBI. account. • Such a property may be mortgaged to any AD Bank for any borrowing. • The marriage should be registered and subsisted on for a period of 2 years Prohibition of acquisition of immovable immediately preceding acquisition of properties in India: immovable property. 23. Citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau, 20. Acquisition by long-term Visa holder: Long term Hong Kong and Democratic People’s Republic of Visa holders who are residing in India (being a Korea cannot, without prior permission of the citizen of Afghanistan, Bangladesh or Pakistan Reserve Bank, acquire or transfer immovable belonging to minority communities in those property in India, other than on lease, not countries viz. Sikhs, Jains, Buddhists, Parisis and exceeding five years. However, if such a person is Christians) are allowed to invest in one residential an OCI, the prohibition is not applicable. property for dwelling and one commercial property for self-employment subject to other conditions as prescribed therein. 21. Acquisition by foreign diplomats: Foreign Embassy / Diplomats / Consulate General may purchase or sell immovable property in India (other than agricultural land, farmhouse or plantation property) subject to obtaining 45 | P a g e Volume -109 August -2023

Insolvency Proceedings Against ‘Financial Service Provider’ under the IBC, 2016 Financial Service Providers (for the sake of brevity “FSPs”), play a crucial role in maintaining the financial stability of a country’s economy. The Insolvency and Bankruptcy Code, 2016 (for the sake of brevity “IB Code”), excluded IFCs from the ambit of the code. Owing to the Financial crisis of big financial houses, resulting in series of investigations and enquiries, the Government has brought the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019, under Section 227 of the code, to bring such Financial Service Providers/categories of Financial Service Providers, as may be notified by the Central Government from time to time, under the ambit of the rules and listed out the resolution process of such stressed FSPs. The Article is an attempt to understand the term “Financial Service Provider“ under the IB Code, and the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019, and also on the recent litigations involving commencement of CIRP against the Financial Service Providers, and the decisions of authorities, in this regard. -Contributed by CS D V K Phanindra & CA Sri Harsha [email protected] 1. The Insolvency and Bankruptcy Code, 2016 (IBC), of definitions, detailed under Section 3 of the IB revolutionized India's insolvency framework by code: providing a consolidated and time-bound process for resolving corporate insolvencies. While the (7) “Corporate Person” means a company as IBC primarily focuses on corporate entities, it also defined in clause (20) of Section 2 of the encompasses a critical aspect concerning Companies Act, 2013 (18 of 2013), a limited Financial Service Providers (FSPs). These FSPs play liability partnership, as defined in clause (n) of a crucial role in maintaining the financial stability sub-section (1) of Section 2 of the Limited of the country’s economy. Liability Partnership Act, 2008 (6 of 2009), or any other person incorporated with limited 2. To understand the term “Financial Service liability under any law for the time being in force Providers” in totality, we need go through a series but shall not include any financial service 46 | P a g e Volume -109 August -2023